TORONTO — The Royal Bank of Canada predicts the Canadian economy will grow by 2.1% this year, and that the central bank will gradually raise interest rates next year.

RBC’s latest Economic and Financial Market Outlook says accommodative monetary policy, continued business spending, supportive labour market conditions and an improving trade balance will lay the foundation for the growth.

The forecast, released early Monday, says lingering downside risks will diminish in the months ahead and clear the way for the Bank of Canada to gradually begin raising interest rates next year.

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The bank’s outlook on inflation remains benign, as the economy is still growing at a rate close to its long-run potential.

The new forecast notes that Canada’s solid economic fundamentals, elevated commodity prices and growing expectations of higher interest rates in 2013 drove the Canadian dollar above parity this quarter.

It adds that even some volatility in commodity prices failed to discourage foreign investment in Canadian assets, as $90 billion of Canadian portfolio securities were bought by foreign investors in the 12 months ending June 2012.

The bank report says demand for household credit slowed significantly during the quarter in response to policy-makers’ continued warnings about heavy debt loads.

The RBC expects Western Canada to dominate the growth rankings, with Alberta’s economy growing by 3.8% this year — the fastest rate in Canada — and by 3.6% next year.

The bank predicts Ontario’s economy will grow at 2.2% this year, compared to 1.9% in 2011. But that is still well short of the 3.4% 10-year average preceding the recession.